Local banks weathered recession

During the dark days of the Great Recession in 2009, T. Rowe Price and BlackRock Inc., the world’s largest asset manager, both took on sizeable stakes in The Washington Trust Co.
T. Rowe, a publicly owned, national investment firm, more than doubled its 4.3 percent stake in the bank, to 8.8 percent.
BlackRock declined to say how much stock it purchased in the Westerly-based bank that year. The Securities and Exchange Commission does not require ownership of less than 5 percent to be reported. In 2008, BlackRock didn’t meet the threshold but by the following year it had a 5.4 percent stake. (BlackRock also reported a 7.5 percent stake in Webster Bank in 2009, after not meeting the 5 percent threshold the previous year.)
SEC filings show that though many investors were trading out of banks at the time, some institutional investors saw opportunity in some of the area’s publicly traded banks. They have generally been rewarded since.
Both T. Rowe and BlackRock have largely maintained their stakes in the local banks, which along with Newport Federal Savings Bank and Brookline Bank – owner of Bank Rhode Island – are currently viewed by many national investment firms as solid performers, according to financial analysts that track the local banks’ performance.
“Washington Trust has done a great job throughout the downturn,” said Frank Schiraldi, associate director for equity research for Sandler O’Neill + Partners of New York. He specializes in evaluating community and regional banks and thrifts.
“Like just about every bank in the country, it was affected by the housing bubble and the recession that followed,” he said. “It has shown strength in underwriting and has made it through the downturn nearly unscathed. It’s a testament to the bank.” The bank is one of the oldest in the nation, and has total assets worth about $3 billion.
At T. Rowe Price, headquartered in Baltimore, portfolio managers actively evaluate and invest in a variety of small and large companies. “We look at individual opportunities with each company,” explained spokesman Brian Lewbart. “It’s not a decision to invest in a small bank or a Rhode Island bank; we look at each individual entity and ask if this is a solid opportunity for a long-term investment. Indexing is a very different style of investing [than what T. Rowe does]. We look at the individual companies.”
For BlackRock, however, the local-bank stakes were purchased through index investing, according to Bobbie Collins, global head of media relations. Many of its investments are passive and not actively managed. Portfolio managers do not comment on any of their clients’ holdings or investments, she said, because they are not research analysts.
It is not unusual, Schiraldi said, for a company the size of BlackRock to own 5 percent of a relatively small bank the size of Washington Trust.
“BlackRock is looking to disperse its investments safely,” he said.
Waterbury, Conn.-based Webster Bank initially suffered during the recession but recovered by mid-2009, thanks to a change in business strategy and a sizeable increase in ownership by Warburg Pincus LLC. The global private-equity firm didn’t meet the 5 percent ownership stake in 2008 but reported a 23.9 percent stake in 2009 that it maintained through last year.
Webster Bank is significantly larger than Washington Trust but Robert H. Ramsey, financial adviser for FBR Capital Markets & Co., Arlington, Va., considers the bank to be midsized. With about $18 billion in assets, however, it is one of the 100-largest banks in the country.
“They have a dominant market share in the Connecticut and Rhode Island area,” he said.
Ramsey says the bank is currently performing well despite setbacks in 2008.
“To say it was caught in the economic recession of 2008 is a fair assessment,” he said. “I think they saw the allure of higher growth and yield by venturing into loans that were outside their core market and competencies. They got into out-of-market home-equity and construction lending. They probably were doing more in terms of asset-based lending and equipment lending than they should have been. As a result they took more risks on their balance sheet that in hindsight weren’t wise.” Since then, “They made a lot of changes and discontinued a lot of the business lines that got them into trouble,” Ramsey said. But then it received recapitalization from Warburg. “It has had a tremendous turnaround,” Ramsey said.
With BlackRock, he said, most of the money it has in Webster is actually owned through index mutual funds, a reflection of the fact that Webster is in the Russell 2000 index, providing broad exposure, low operating expenses and low portfolio turnover – a lower-cost, lower-risk investment than owning an individual stock.
“With Warburg it’s different. It made a decision in late 2009 to [more than double its investment] in Webster,” Ramsey said. “It owns a significant part of Webster and it’s private equity. It is looking to be a partner in some respects. Webster is a key investment for Warburg.”
With total assets worth $500 million, Newport Federal Savings Bank is the smallest of the local, publicly traded institutions.
“NewportFed went through the downturn but took it well,” Schiraldi said. “It has very conservative underwriters, so its credit has been pristine. It was never boom or bust, so it has remained stable.” Wellington Management Co., one of the largest private, independent investment-management companies in the world, owns about 18 percent of the bank.
“Wellington is a large institution and is in many of these banks,” Schiraldi said. “It appears as a large investor usually because the bank is so small and their institution is so large.”
As of January, Bank Rhode Island has been part of Brookline Bancorp Inc., based in Brookline, Mass. “They have grown through acquisitions, and they have also had good organic loan growth as well,” Ramsey said of Brookline. “They are a very high-quality institution, they didn’t make mistakes and have stuck to what they do best,” he said.
He noted that the bank has done more commercial and industrial lending than in the past, all with very little risk but very profitable.
Ramsey said Brookline paid full price for Bank Rhode Island and perhaps could have purchased it for less. “[BankRI] was a good franchise and it appears that a lot of the benefits were given to Bank Rhode Island shareholders at the expense of the Brookline shareholders,” Ramsey said. “I think they got a good price.”
Matthew B. Kelley, senior research analyst of the Sterne Agee Group of Portland, Maine, said Brookline is financially solid. “Brookline is a high-quality, Northeast franchise. The management team there has a good track record on executing deals,” he said.
Kelley, who has followed the bank for years, said it has a unique merger and acquisition strategy; it will leave the acquired institutions alone in terms of its front-line operations, to a much larger degree than other banks.
“You will see a lot of people left in place in terms of their commercial-lending teams,” he said. “I give them high marks on that strategy, because it is different.
“My take on the stock is that they will be in the acquiring mode over the next one to three years,” he said. “I think the aim here is to get the bank to a level of about $7 billion in assets.” The goal, Kelley said, is to “build the premier New England bank franchise.”
Brookline Bancorp CEO Paul A. Perrault has a history of building and selling financial institutions such as Sovereign BanCorp. Inc., Chittenden Corp. and Bank of New England-Old Colony Bank.
“I also give them high marks for their franchise; I think it is one of the more valuable ones out there,” Kelley said. •

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